VoxEU Column Europe's nations and regions Global crisis

An investigation of the root causes of the Greek crisis

The Greek crisis is typically seen as a sovereign debt crisis. Using a new dataset, this column explores the dynamics of national wealth accumulation in Greece over the past two decades. It argues that, despite certain idiosyncrasies, the Greek crisis can be better characterised as a balance of payments crisis. This implies that Greece shouldn’t be seen as an outlier amongst the periphery Eurozone countries. 

There are currently two conflicting views of the Eurozone Crisis, in both policy and academic circles – it is either considered to be a sovereign debt crisis, or a balance of payments crisis. Looking closer, one readily admits that the type of crisis must be country-specific. The Greek crisis is widely seen as a sovereign debt crisis, while those in Ireland, Portugal, and Spain are characterised as balance of payments crises (Baldwin and Giavazzi 2015, IEO 2016). These views are difficult to reconcile, and thus Greece is willingly depicted as an ‘outlier’ and the ‘exogenous trigger’ (Wyplosz 2015) of the Eurozone crisis.

As a consequence, there is a great temptation to resort to a political explanation of the Greek crisis, based solely on fiscal indiscipline. However, Gourinchas et al. (2016) highlight the role of the sudden stop suffered by the private sector in the output drop. This suggests there may have been, before the crisis, broader pernicious dynamics at play in the economy that have not been investigated so far.  The objective of this column is to study the dynamics of national wealth accumulation prior to and during the Greek crisis.

Construction of the national balance sheet

To do so, I rely on a dataset that tracks the evolution of the balance sheet of each of the main economic sectors.1 International guidelines provide a comprehensive framework to construct such a ‘national balance sheet’.2

All economic assets (Figure 1) – that is, all assets over which ownership rights can be enforced and which provide economic benefits to their owners – are recorded at their current market or fair value whenever possible.3

Then, national balance sheets make it possible to derive wealth series. National wealth can be either decomposed as the sum of domestic and foreign wealth, or as the sum of private and government wealth.4

The problem is that Greece has no such official national balance sheet yet. It is nonetheless possible, using data from several reliable sources, to build one that is consistent with the aforementioned guidelines.5

Figure 1 Composition of a national balance sheet, breakdown by asset classes

Sources: United Nations, Eurostat  

The resulting 1997-2014 series teach us that:

  • The national wealth-income ratio follows an inverted V-shaped curve, culminating in 2011.6
  • The accumulation of domestic capital has been the main driver of national wealth. The concomitant build-up of a negative net foreign asset position has also influenced the trajectory of national wealth, first by limiting its increase prior to the crisis, before reinforcing its decline.
  • Private wealth rose sharply until 2007 before collapsing.
  • The pre-crisis growth in private assets was supported by fixed assets (mostly dwellings), while the increase in private liabilities came from loans granted by domestic banks.
  • During the crisis, dwellings have plunged in value, while deleveraging has remained relatively modest.
  • Despite the well-known increase in public debt, government wealth remained positive until 2013 due to the sustained growth of public assets, namely fixed assets (mostly public infrastructure) before the crisis and domestic corporations’ equity at the beginning of the crisis.7

The following figures about government wealth provide some information on a specific, yet critical, component of national wealth.8

Figure 2 Historical series of government wealth, assets, and liabilities, as percentage of national income (1997-2014)

Source: Hyppolite (2016)

Figure 3 Breakdown of government assets by asset classes, as percentage of national income (1997-2014)

Source: Hyppolite (2016)

Figure 4 Breakdown of government non-financial assets (i.e., fixed assets and natural resources), by asset classes (end of year 2012)

Source: Hyppolite (2016)

Figure 5 Breakdown of government liabilities by asset classes, as percentage of national income (1997-2014)

Source: Hyppolite (2016)

Analysis of national wealth accumulation

Breaking down the real growth rate of national wealth into a savings/investment-induced growth rate, and a real capital gains/losses-induced growth rate (Table 1), we find that, before the crisis:

  • Real capital gains on the domestic capital stock explained the bulk of the increase in national wealth;
  • Investments in overvalued domestic assets were sustained by net borrowings from the rest of the world.

Subsequently, the crisis involved the bursting of the real estate bubble, destroying the entire wealth accumulated through new investments before the crisis.

Table 1 Decomposition of national wealth accumulation between foreign and domestic wealth (1997-2014)

Source: Hyppolite (2016)

Going further into a sectoral breakdown (Table 2), we learn that:

A. Before the crisis

  • households were the primary beneficiaries from real capital gains and the main driver of domestic investment;
  • the government and corporations contributed to domestic capital accumulation in similar proportions in terms of investment flows; and
  • the rising external indebtedness was mostly driven by borrowings from the government, followed by banks, as well as by significant real capital losses of domestic corporations.

B. During the crisis 

  • Greece experienced a prolonged investment slump in both the private and public sectors;
  • official bailouts resulted in persistent external government borrowings, while domestic banks adjusted their net foreign asset position following the drying-up of the interbank market; and,
  • real capital gains on net foreign assets have been concentrated on government tradable debt and domestic corporations’ equity.9

Table 2 Sectoral decomposition of national wealth accumulation between foreign and domestic wealth (1997-2014)


Source: Hyppolite (2016)

A balance of payments crisis

These findings offer insight into the unsustainable macroeconomic dynamics that preceded the crisis – capital accumulation was artificially driven up by a real estate bubble,10 and was especially pernicious because investments in overvalued assets were financed through external borrowing.

That leads us to depart from the conventional explanation of the Greek crisis, which appears actually closer to a balance of payments crisis than to a sovereign debt crisis, thereby sharing strong similarities with the crises of other periphery countries.11 The key difference between them thus simply comes down to the relative involvement of the various economic sectors in domestic investment, and their financing through external borrowing. In Greece, the government was relatively more involved in this process than domestic firms (Figure 6). Hence, the crisis started as an external public – instead of private – debt crisis.

Figure 6 Government’s contribution to net capital formation as a share of corporations’ contribution to net capital formation (1997-2008)     

Source: AMECO

How can this stronger public-sector involvement be explained? One hypothesis is that the government had to ‘step in’ by substituting to domestic firms because the latter were credit-constrained. Indeed, external borrowings by Greek firms in the form of corporate bonds remained virtually non-existent over the pre-crisis period, while foreign savings channelled by Greek banks mostly benefitted households.

These credit constraints may be related to the small size of firms. As shown in Figure 7, Greece displays the smallest share of medium-sized and large firms within the Eurozone and, among small firms, the highest concentration of micro firms.12

Figure 7 Relative size of Greek firms   

Source: Structural Business Statistics Database (Eurostat)

So, is the ‘fiscal indiscipline theory’ irrelevant?

However, only one third of the pre-crisis increase in government external debt can be attributed to public investments. The rollover of public debt held by domestic creditors accounts for another third,13 while the last third is due to higher final consumption expenditure. But what is really specific to Greece compared to other periphery countries is not the increase in government expenditure per se, but rather the government inability to raise its revenue at the same pace – which is all the more worrying as the value of public and private assets significantly increased (Figure 8).

Figure 8 Historical series of private assets, government assets, and government revenue, as percentage of national income (1997-2014)

Source: Hyppolite (2016)

Hence, the fiscal and macroeconomic dimensions of the crisis are actually closely interrelated – without dysfunctions in the tax administration and a mismanagement of public assets, government revenue would have increased with the real estate bubble and the new public investments; conversely, without the real estate bubble, declining national saving, and firms’ credit constraints, the government would not have had to borrow as much from the rest of the world to roll over its debt and support domestic investment.

So, to the widespread view that the Greek crisis is all about fiscal indiscipline, I propose a more balanced approach in which the fiscal slippage plays an important role, but against the background of broader macroeconomic dynamics.

Policy implications

This study has policy implications, both at the domestic and Eurozone levels.

First of all, as the external imbalance of the government has kept deteriorating, a priority remains to reach a credible deal between Greece and its creditors to achieve public debt sustainability.

But beyond this familiar issue, two conclusions regarding domestic policies emerge. On the fiscal front, securing a strong revenue base is critical to avoid future fiscal slippages. This requires combatting tax fraud14 and monetising underexploited public assets.15 On the corporate front, eliminating credit constraints that have impeded business financing is vital to lay the foundations for durable growth. This implies, on the real side, removing the regulations that may distort the size of firms, introducing size-based fiscal incentives to encourage partnerships, and on the financial side, deepening the domestic credit and equity markets.

However, any policy response that would stick to a domestic agenda would be incomplete. The Eurozone crisis demands a collective response since its source must be found in the misallocation of capital flowing from core to periphery countries. As of now, much has been done to design mechanisms to tackle the next crisis, but much less to prevent it from happening.

On the macroeconomic front, the objective comes down to working towards a cross-country allocation of savings to productive investments. This calls for:

  • removing national regulations that keep preventing the free allocation of capital;
  • facilitating firms’ access to funding through non-banking channels; and
  • monitoring capital flows to avoid the emergence of regional asset bubbles.

Finally, on the fiscal front, the domestic effort needs to be coupled with a fight at the EU level against offshore tax evasion.16


Artavanis, N, A Morse and M Tsoutsoura (2016), “Measuring income tax evasion using bank credit: Evidence from Greece”, Quarterly Journal of Economics, 131(2): 739-798.

Baldwin, R and F Giavazzi (2015), The Eurozone Crisis: A consensus view of the causes and a few possible solutions, VoxEU.org eBook, 7 September.

Gourinchas, P-O, T Philippon and D Vayanos (2016), “The analytics of the Greek crisis”, working paper prepared for the 2016 NBER Macroeconomics Annual, 14 June (see also the summary on VoxEU.org: “The Greek Crisis: An autopsy”, 5 August).

Hyppolite, P-A (2016), “Towards a theory on the causes of the Greek depression: An investigation of national balance sheet data (1997-2014)”, ELIAMEP Crisis Observatory and Center for European Studies, Harvard University, working paper.

Hyppolite, P-A and N Roussille (2016), “A more ambitious agenda is needed to help achieve public debt sustainability in Greece”, Harvard Kennedy School Review, 17 August.

IEO (2016), “The IMF and the crises in Greece, Ireland, and Portugal: an evaluation by the Independent Evaluation Office”, Independent Evaluation Office of the International Monetary Fund, 8 July report.

Piketty, T and G Zucman (2014), “Capital is back: Wealth-income ratios in rich countries 1700-2010”, Quarterly Journal of Economics, 129(3): 1155-1210.

Roussille, N (2015), “Tax evasion and the ‘Swiss cheese’ regulation”, Paris School of Economics, mimeo.

Wyplosz, C (2015), “The Eurozone crisis: Too few lessons learned”, in R Baldwin and F Giavazzi (eds) The Eurozone Crisis: A consensus view of the causes and a few possible solutions, VoxEU.org eBook, 7 September.


[1] Three economic sectors can be distinguished—households, the government, and corporations. The ‘households’ sector notably includes the Orthodox Church. The ‘government’ sector is to be understood in a broad sense—it incorporates central and local governments as well as social security administrations. Finally, the ‘corporations’ sector encompasses both financial and non-financial corporations.

[2] Those guidelines have been elaborated by the UN and Eurostat. Following the publication of the latest versions (SNA 2008, ESA 2010), a few national statistical institutes have begun to publish retrospective national balance sheets. These are the data used by Piketty and Zucman (2014).

[3] As a first best, statisticians therefore draw on market quotes, comparables, market surveys, etc. to value the balance sheet assets. As a second best, they use the historical value, cumulate past investment flows (net of capital depreciation) and adjust for market valuation using a relevant price index. As a last resort, they estimate the net present value by discounting future revenue streams. This third valuation methodology is notably used to determine the value of natural reserves like proven reserves of hydrocarbons and minerals.

[4] Each economic sector has a ‘wealth’ equal to the sum of its financial plus non-financial assets minus its liabilities, and national wealth is defined as the sum of the wealth of all economic sectors. Domestic wealth and foreign wealth are respectively equal to the sum of non-financial assets and of net foreign assets of all economic sectors. Private wealth is nothing else than the wealth of the households sector.

[5] I refer the reader to Hyppolite (2016) for all the details regarding the construction of the dataset.

[6] So, compared to output, national wealth grew faster before the crisis and has declined more sharply during the crisis. The same observation can be made with the 2008 financial crisis in the US. Profound and prolonged economic crises therefore seem to destroy relatively more wealth than income.

[7] This can notably be linked to the 2008 bank support plan through which the Greek government purchased preference shares issued by distressed banks. Most strikingly, even after the recent wave of privatisations, the concentration of domestic assets in government hands appears significantly higher in Greece than in other member states of the Eurozone. Historical data for other countries are available in the World Wealth & Income Database. In terms of order of magnitude, public assets today account for about 230% of national income in Greece, 150% in France and Spain, 110% in Germany and 90% in Italy.

[8] In particular, public assets grew at roughly the same pace as public debt between 1997 and 2009, and the government wealth to national income ratio remained pretty stable around 25%. Then, in 2010-2011, it abruptly rose due to the sharp decline in the market value of government tradable debt. Finally, in 2012-2014, the surge in public debt following the official bailouts and the parallel decline in the value of public assets led to a marked decrease in government wealth.

[9] Thanks to these capital gains, Greece has managed to stabilise its external imbalance. However, as far as the government sector is concerned, the real capital gains have up to now not been sufficient to stabilise its net external position.

[10] ‘Real estate’ is meant in the broadest sense of the term—it includes residential and commercial property, land and infrastructure.

[11] A domestic boom, fuelled by a real estate bubble, inflated by foreign capital flows, and followed by an acute trend reversal when foreign creditors realised that debts would not be paid off.

[12] Medium-sized and large firms are defined as firms with more than 50 persons employed, small firms as firms with less than 49 persons employed and micro firms as firms with less than 10 persons employed.

[13] This is the logical consequence of the decline in national saving in the context of the real estate bubble.

[14] Artavanis et al. (2016) estimate that roughly 50% of self-employment income went unreported in Greece in 2009. This represents €28.2 billion, or €11 billion in foregone tax revenues for this year alone (i.e., 30% of the fiscal deficit).  

[15] Monetisation could take various forms: re-pricings, concessions, leases, etc.

[16] Roussille (2015) estimates that the value of offshore assets held by Greek households in Switzerland alone was €67 billion in 2013 (i.e., 52% of the ‘official’ financial wealth of households, or 12% of private wealth). We point out in Hyppolite and Roussille (2016) that if the government could track down this hidden wealth in Switzerland, it would receive a one-time revenue of at least €8 billion and subsequently increase its annual revenue base by about €600 million. 

5,984 Reads